FAQ - 15 January 2014

Q: I have a client that has 3 children
(none who are minors) for whom he wants to give R 1 500 000 each and
he wanted to know what tax implications this transaction will have.

To my
knowledge there will be donation’s tax if the funds are given to them without
any repayment. I have identified the following two options:

·The donations tax is either at 20% of the R 1 500 000 when
the loan is given; or

·Donations tax on the interest free component each year (after any
repayments or donations (exempt donations are currently R 100 000 in total
per year) per taxpayer, in other words the client).

Are these
the only two options or are there any other options I might have missed? Any
exemptions I might have missed?

A: The answer to your question is fact dependent. The following guidance
should be useful in this regard:

In the event that the father pays the monies
to the children without it being in the form of a loan (thus a pure donation),
then the transaction may result in donations tax at a rate of 20% in the hands
of the father in terms of s 54 of the Income Tax Act.

Where the payment to the children is made in
the form of a bona fide loan, the facts and circumstances of the case must be
considered to determine whether interest should be charged. It was held in the
case of C: SARS v Woulidge 63 SATC 483 2002 (1) SA 68 (SCA) that
an interest-free loan (more specifically the interest that should have been
charged) may constitute an other disposition as contemplated in section 7. If
any of the provisions of section 7 may apply (for example, the interest free
loan is made available conditionally to the children (s 7(5)), the lack of
interest may constitute an other disposition in which case the parent (donor)
may be taxed on income generated by the child as a result of the loan being
interest free. If none of the scenarios contemplated in section 7 are
applicable, the fact that the loan is interest-free may have tax
implications. It should be noted that a loan that is interest-free from the
date that it is advanced should not have donations tax implications as no
property is disposed of. If the father however waives his established right to
interest, this waiver should attract donations tax.

It should furthermore be noted that a loan which is
advanced with the intention of being written off (i.e. utilising the R100 000
annual exemption) may not be a bona fide loan; in such a case the risk may
exist that SARS could view this loan as a simulated donation (in the case of
C:SARS v NWK Ltd 73 SATC 55 [2011] 2 All SA 347
(SCA) it was held that: "In my view the test to determine simulation
cannot simply be whether there is an intention to give effect to a contract in
accordance with its terms. Invariably where parties structure a transaction to
achieve an objective other than the one ostensibly achieved they will intend to
give effect to the transaction on the terms agreed. The test should thus go
further, and require an examination of the commercial sense of the transaction:
of its real substance and purpose. If the purpose of the transaction is only to
achieve an object that allows the evasion of tax, or of a peremptory law, then it
will be regarded as simulated. And the mere fact that parties do perform in
terms of the contract does not show that it is not simulated: the charade of
performance is generally meant to give credence to their simulation").

It should also be noted that should the
children be required to do something (give quid pro quo) in exchange for the
interest-free nature of the loan, this benefit may be treated as an amount in
their hands and could be included in their gross income (see Brummeria
Renaissance (Pty) Ltd and Others, C: SARS v 69 SATC 205 2007 (SCA)). This would
depend on the facts of the particular arrangement between the father and the
children.

Lastly, it will be different in the instance where the
father instructed that the loan be made from a company where he is a
shareholder, and the loan is made to a connected person in relation to that
shareholder. Such a loan may constitute a deemed dividend in accordance with
section 64E(4) and be subject to dividends tax if the loan does not bear
interest at the official rate in terms of the Seventh
Schedule. Furthermore, and assuming that the father is a shareholder of a
company, and a donation is made by that company to his sons on the instance of
the father (shareholder), may the father become liable for donations tax in
terms of s 57 of the Income Tax Act.

2. Requirements for a
valid tax invoice – section 20 of the VAT Act

Q: A person is not registered for Vat. He
issues an invoice for services, but the word "TAX" on the invoice is
crossed out, leaving only "INVOICE" on the paper. Tax Invoice books
are easy available, but Invoice books not so much.

Is this
illegal? One of his customers is refusing to pay him now, because of the
crossed out word.

Please note,
the invoice clearly states no VAT is charged.

A: A "tax invoice” is defined in s 1 of the
Value Added Tax Act as a document as required in terms of s 20 of the Value
Added Tax Act. The document described below would not fall within this
definition as it has not met the requirements of the Act. Therefore, even
though the document includes the words "tax invoice”, this should have no
bearing for purposes of the Value Added Tax Act as the person is not a VAT
vendor.

Conclusion

The invoice is not
a "tax invoice” as defined and should not serve any purpose for the Value Added
Tax Act. The fact that the words tax invoice shows on the invoice is neither
here nor there as the invoice is merely an invoice in the normal sense.

3. Submission of
FTW01 form for section 6quin rebate

Q: If we submit our FTW01 form late, will we
still be able to claim our foreign tax credit?

A: In terms of s 6quin, sub-section 3(A) of the
Income Tax Act, no deduction in terms of that section of the Act may be allowed
where a declaration (form FTW01) was not submitted within 60 days from the date
when the tax was levied and withheld.

Comments...

Witn regards to Q1 (loan to children), I would further suggest that the client must also consider the CGT and Estate Duty implications of creating this asset (debt) and how this will be dealt with in future if it is not repaid. Such a loan can potentially store up future tax problems which need to be planned for.

WHY REGISTER WITH SAIT?

Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

MINIMUM REQUIREMENTS TO REGISTER

The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.